Finisar's stock jumped 28 percent in premarket trading after the deal was announced.
Finisar will transform a shuttered, 700,000-square-foot manufacturing plant in Sherman, Texas, into a high-tech facility developing VCSEL (vertical-cavity surface-emitting laser) chips. These chips enable depth and proximity sensing, helping to power some of Apple's new features, including Face ID, Animoji, and ARKit, which is the set of tools that allow developers to create augmented reality apps.
There are three VCSELs in every iPhone X. VCSEL chips also are used in Apple's AirPods, but those chips are not made by Finisar.
The new facility is expected to open in the second half of next year.
"VCSELs power some of the most sophisticated technology we've ever developed and we're thrilled to partner with Finisar over the next several years to push the boundaries of VCSEL technology and the applications they enable," Apple Chief Operating Officer Jeff Williams said in a statement.
Finisar CEO Jerry Rawls said: "When you combine our proven ability to consistently manufacture exceptional products with our new state-of-the-art Sherman facility, we're confident we can achieve our shared goal of providing consumers with incredibility exciting features."
Apple's investment will also create more than 500 jobs at the new Sherman plant, including engineers, technicians and maintenance teams.
Finisar's primary products are transceivers and transponders that enable high-speed voice, video and data communications for networking, storage, wireless and cable TV applications. The company, founded in 1988, is headquartered in Sunnyvale, California, and employs 14,000 people. In addition to Apple, its customers include Cisco, Huawei, IBM and Hewlett Packard Enterprise.
The company says its VCSEL business currently generates revenue in the "low single-digit millions," but clearly there could be much more demand in the quarters ahead: In the fourth quarter of this year, Apple alone will purchase 10 times more VCSEL wafers than previously manufactured globally over a similar time period.
Apple says the Advanced Manufacturing Fund is designed to encourage innovative production and highly skilled jobs. In May, Apple announced a $200 million investment in Corning, which manufactures the glass used in iPhones and other Apple products.
Correction: An earlier version incorrectly stated that Finisar VCSEL chips are used in Apple's AirPods.